UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
 
 
 FORM
10-Q
 
 (Mark
One)
 
 x
                          QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the thirteen weeks ended March
      28,
2009
   o
                            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from _______to
_______
 
 Commission
File Number 1-5084
 
 TASTY
BAKING COMPANY
 (Exact
name of Company as specified in its charter)
  Pennsylvania
                    (State
      of Incorporation)
                  
                  23-1145880
                    (IRS
      Employer Identification Number)
 
  Navy
Yard Corporate Center, Three Crescent Drive, Suite 200, Philadelphia,
Pennsylvania  19112
 (Address
of principal executive offices including Zip Code)
 
 215-221-8500
 (Company's
telephone number, including area code)
 
 2801
Hunting Park Avenue, Philadelphia, Pennsylvania  19129
 (Former
Name or Former Address, if Changed Since Last Report)
  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 YES x
              NO o
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
 YES o
              NO o
  Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company.  See the
definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange
Act.
 Large
      accelerated filer
                                          o
                                          Accelerated
      filer
                                          oNon-accelerated
      filer
                                          o
                                          Smaller
      reporting company
                                          x
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 YES o
              NO x
  There were
8,576,448 shares of Common Stock outstanding as of May 4, 2009.
  
 
 TASTY
BAKING COMPANY AND SUBSIDIARIES
 
 
 INDEX
  PART
      I.
                            FINANCIAL
      INFORMATIONItem
      1.
                            Financial
      Statements (Unaudited)Condensed
      Consolidated Balance SheetsMarch
      28, 2009 and December 27, 2008
                            3Condensed
      Consolidated Statements of OperationsThirteen
      weeks ended March 28, 2009 and March 29, 2008
                            4Condensed
      Consolidated Statements of Cash FlowsThirteen
      weeks ended March 28, 2009 and March 29, 2008
                            5Notes to Condensed Consolidated Financial
      Statements
                            6-19Item
      2.
                            Management's
      Discussion and Analysis of FinancialCondition
      and Results of Operations
                            20-24Item
      3.
                            Quantitative and Qualitative Disclosure about Market
      Risk
                            24Item
      4.
                            Controls and Procedures
                            24PART
      II.
                            OTHER
      INFORMATIONItem
      6.
                            Exhibits
                            25Signature
                            
                            26
   2
  Part
I. FINANCIAL INFORMATION
 Item
1.    Financial
Statements
  TASTY
BAKING COMPANY AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 (000’s)
 March
      28, 2009
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  December
      27, 2008AssetsCurrent
      assets:Cash
      and cash equivalents
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  76
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  58Receivables,
      less allowance of $2,815 and $2,862, respectively
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  22,915
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  21,519Inventories
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  7,883
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  7,190Deferred
      income taxes
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  2,707
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  2,707Prepayments
      and other
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  3,983
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  3,200Total
      current assets
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  37,564
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  34,674Property,
      plant and equipment:Land
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,433
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,433Buildings
      and improvements
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  52,092
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  52,052Machinery
      and equipment
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  133,768
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  132,609Construction
      in progress
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  50,419
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  37,412237,712
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  223,506Less
      accumulated depreciation and amortization
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  128,390
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  125,218109,322
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  98,288Other
      assets:Long-term
      receivables from independent sales distributors
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  9,924
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  9,817Deferred
      income taxes
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  13,358
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  13,088Miscellaneous
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  3,199
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  3,33026,481
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  26,235Total
      Assets
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  173,367
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  159,197LiabilitiesCurrent
      liabilities:Accounts
      payable
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  12,692
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  7,641Accrued
      payroll and employee benefits
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  5,890
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  5,182Cash
      overdraft
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  3,161
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  2,770Current
      obligations under capital leases
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  772
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  720Notes
      payable, banks and current portion of long-term debt
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,000
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,000Other
      accrued liabilities
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  4,964
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  6,419Reserve
      for restructure
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,652
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -Total
      current liabilities
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  30,131
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  23,732Accrued
      other liabilities
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  5,415
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  5,256Accrued
      pension
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  27,446
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  27,921Asset
      retirement obligation
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  7,146
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  7,050Long-term
      debt
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  67,561
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  57,194Long-term
      obligations under capital leases, less current portion
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,234
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,199Postretirement
      benefits other than pensions
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  2,134
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  2,226Reserve
      for restructure
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,652Total
      liabilities
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  141,067
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  126,230Shareholders'
      equityAccumulated
      other comprehensive income (loss)
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (5,920
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (5,599
                                                                                                                                  )Capital
      in excess of par value of stock
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  28,557
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  28,699Common
      stock, par value $0.50 per share, and entitled to one
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  4,558
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  4,558vote
      per share: Authorized 30,000 shares, issued 9,116 sharesRetained
      earnings
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  16,160
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  16,653Treasury
      stock, at cost
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (11,055
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (11,344
                                                                                                                                  )Total
      shareholders' equity
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  32,300
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  32,967Total
      Liabilities and Shareholders' Equity
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  173,367
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  159,197
 The
      accompanying notes are an integral part of these unaudited condensed
      consolidated financial
statements.
  3
 
 TASTY
BAKING COMPANY AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 (000’s,
except per share amounts)
  For
      the Thirteen Weeks EndedMarch
      28, 2009
                                              
                                              
                                              March
      29, 2008Gross
      sales
                                              
                                              $
                                              76,930
                                              
                                              
                                              $
                                              69,294Less
      discounts and allowances
                                              
                                              
                                              (30,767
                                              )
                                              
                                              
                                              (26,472
                                              )Net
      sales
                                              
                                              
                                              46,163
                                              
                                              
                                              
                                              42,822Costs
      and expenses:Cost
      of sales, exclusive of depreciation shown below
                                              
                                              
                                              29,921
                                              
                                              
                                              
                                              28,794Depreciation
                                              
                                              
                                              3,240
                                              
                                              
                                              
                                              3,030Selling,
      general and administrative
                                              
                                              
                                              12,695
                                              
                                              
                                              
                                              12,012Interest
      expense
                                              
                                              
                                              604
                                              
                                              
                                              
                                              456Other
      income, net
                                              
                                              
                                              (208
                                              )
                                              
                                              
                                              (199
                                              )46,252
                                              
                                              
                                              
                                              44,093Income
      (loss) before provision forincome taxes
                                              
                                              
                                              (89
                                              )
                                              
                                              
                                              (1,271
                                              )Provision
      (benefit) for income taxes
                                              
                                              
                                              (19
                                              )
                                              
                                              
                                              (312
                                              )Net
      income (loss)
                                              
                                              $
                                              (70
                                              )
                                              
                                              $
                                              (959
                                              )Average
      common shares outstanding:Basic
                                              
                                              
                                              8,059
                                              
                                              
                                              
                                              8,034Diluted
                                              
                                              
                                              8,059
                                              
                                              
                                              
                                              8,034Per
      share of common stock:Net
      income (loss):Basic
                                              
                                              $
                                              (0.01
                                              )
                                              
                                              $
                                              (0.12
                                              )Diluted
                                              
                                              $
                                              (0.01
                                              )
                                              
                                              $
                                              (0.12
                                              )Cash
      dividend
                                              
                                              $
                                              0.05
                                              
                                              
                                              $
                                              0.05
   The
      accompanying notes are an integral part of these unaudited condensed
      consolidated financial
statements.
  4
  TASTY
BAKING COMPANY AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (000’s)
  For
      the Thirteen Weeks EndedMarch
      28, 2009
                                                                                    
                                                                                    
                                                                                    March
      29, 2008Cash
      flows from (used for) operating activitiesNet
      income (loss)
                                                                                    
                                                                                    $
                                                                                    (70
                                                                                    )
                                                                                    
                                                                                    $
                                                                                    (959
                                                                                    )Adjustments
      to reconcile net income (loss) to netcash
      provided by operating activities:Depreciation
                                                                                    
                                                                                    
                                                                                    3,240
                                                                                    
                                                                                    
                                                                                    
                                                                                    3,030Amortization
                                                                                    
                                                                                    
                                                                                    91
                                                                                    
                                                                                    
                                                                                    
                                                                                    76Asset
      retirement obligation interest
                                                                                    
                                                                                    
                                                                                    97
                                                                                    
                                                                                    
                                                                                    
                                                                                    92Defined
      benefit pension expense (benefit)
                                                                                    
                                                                                    
                                                                                    209
                                                                                    
                                                                                    
                                                                                    
                                                                                    (146
                                                                                    )Pension
      contributions
                                                                                    
                                                                                    
                                                                                    (630
                                                                                    )
                                                                                    
                                                                                    
                                                                                    -(Increase)
      deferred taxes
                                                                                    
                                                                                    
                                                                                    (270
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (690
                                                                                    )Post
      retirement medical
                                                                                    
                                                                                    
                                                                                    (156
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (425
                                                                                    )Other
                                                                                    
                                                                                    
                                                                                    125
                                                                                    
                                                                                    
                                                                                    
                                                                                    (261
                                                                                    )Changes
      in assets and liabilities:Increase
      in receivables
                                                                                    
                                                                                    
                                                                                    (1,379
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (836
                                                                                    )(Increase)
      decrease in inventories
                                                                                    
                                                                                    
                                                                                    (693
                                                                                    )
                                                                                    
                                                                                    
                                                                                    474Increase
      in prepayments, deferred taxes and other
                                                                                    
                                                                                    
                                                                                    (875
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (704
                                                                                    )Increase
      in accrued taxes
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    207Increase
      (decrease) in accounts payable, accruedpayroll
      and other current liabilities
                                                                                    
                                                                                    
                                                                                    4,303
                                                                                    
                                                                                    
                                                                                    
                                                                                    (2,779
                                                                                    )Net
      cash from (used for) operating activities
                                                                                    
                                                                                    
                                                                                    3,992
                                                                                    
                                                                                    
                                                                                    
                                                                                    (2,921
                                                                                    )Cash
      flows from (used for) investing activitiesPurchase
      of property, plant and equipment
                                                                                    
                                                                                    
                                                                                    (14,274
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (8,877
                                                                                    )Independent
      sales distributor loan repayments
                                                                                    
                                                                                    
                                                                                    666
                                                                                    
                                                                                    
                                                                                    
                                                                                    813Loans
      to independent sales distributors
                                                                                    
                                                                                    
                                                                                    (790
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (989
                                                                                    )Other
                                                                                    
                                                                                    
                                                                                    2
                                                                                    
                                                                                    
                                                                                    
                                                                                    (106
                                                                                    )Net
      cash used for investing activities
                                                                                    
                                                                                    
                                                                                    (14,396
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (9,159
                                                                                    )Cash
      flows from (used for) financing activitiesDividends
      paid
                                                                                    
                                                                                    
                                                                                    (423
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (413
                                                                                    )Increase
      in long-term debt
                                                                                    
                                                                                    
                                                                                    41,750
                                                                                    
                                                                                    
                                                                                    
                                                                                    39,790Payment
      on long-term debt
                                                                                    
                                                                                    
                                                                                    (31,295
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (28,819
                                                                                    )Net
      increase in cash overdraft
                                                                                    
                                                                                    
                                                                                    390
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,538Net
      cash from financing activities
                                                                                    
                                                                                    
                                                                                    10,422
                                                                                    
                                                                                    
                                                                                    
                                                                                    12,096Net
      increase in cash
                                                                                    
                                                                                    
                                                                                    18
                                                                                    
                                                                                    
                                                                                    
                                                                                    16Cash,
      beginning of year
                                                                                    
                                                                                    
                                                                                    58
                                                                                    
                                                                                    
                                                                                    
                                                                                    57Cash,
      end of period
                                                                                    
                                                                                    $
                                                                                    76
                                                                                    
                                                                                    
                                                                                    $
                                                                                    73Supplemental
      Cash Flow InformationCash
      paid during the period for:Interest
                                                                                    
                                                                                    $
                                                                                    798
                                                                                    
                                                                                    
                                                                                    $
                                                                                    386Income
      taxes
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    23
   The
      accompanying notes are an integral part of these unaudited condensed
      consolidated financial
statements.
  5
  Notes to
Condensed Consolidated Financial Statements
 All
disclosures are pre-tax, unless otherwise noted.
 
 1.      Summary
of Significant Accounting Policies
 
 Nature
of the Business
 Tasty
Baking Company (the “Company”) is a leading producer of sweet baked goods and
one of the nation’s oldest and largest independent baking companies, in
operation since 1914.  It has two manufacturing facilities, one in
Philadelphia, PA, and a second in Oxford, PA.
 
 Fiscal
Year
 The
Company and its subsidiaries operate on a 52-53 week fiscal year, ending on the
last Saturday of December.  Fiscal year 2009 is a 52-week
year.  Fiscal year 2008 was a 52-week year.
 
 Basis
of Presentation
 The
condensed consolidated financial statements include the accounts of the Company
and its subsidiaries.  All significant intercompany accounts and
transactions have been eliminated.
 
 The
condensed consolidated financial statements included herein have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission.  Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles in the United States of America (“GAAP”) have
been condensed or omitted pursuant to such rules and
regulations.  In the opinion of the Company, the accompanying
unaudited condensed consolidated interim financial statements reflect all
adjustments, consisting of only normal recurring items, which are necessary for
a fair statement of the results of operations for the periods shown.  The
results of operations for such periods are not necessarily indicative of the
results expected for the full year or for any future period.
 
 The
preparation of condensed consolidated financial statements in conformity with
GAAP requires management to make estimates, judgments and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities.  On an on-going
basis, the Company evaluates its estimates, including those related to customer
sales, discounts and allowances, long-lived asset impairment, indefinite-lived
asset impairment, pension and postretirement plan assumptions, workers’
compensation expense and income taxes.  Actual results may differ from
these estimates.
 
 Concentration of
Credit
 The
Company encounters, in the normal course of business, exposure to concentrations
of credit risk with respect to trade receivables.  Ongoing credit
evaluations of customers’ financial conditions are performed and, generally, no
collateral is required.  The Company maintains reserves for potential
credit losses and such losses have not exceeded management’s
expectations.
 
 Revenue
Recognition
 Revenue is
recognized when title and risk of loss pass, which is upon receipt of goods by
the independent sales distributors, retailers or third-party
distributors.  For route area sales, the Company sells to independent
sales distributors who, in turn, sell to retailers.  Revenue for sales
to independent sales distributors is recognized upon receipt of the product by
the distributor.  For sales made directly to a customer or a
third-party distributor, revenue is recognized upon receipt of the products by
the retailer or third-party distributor.
 
 Sale
of Routes
 Sales
distribution routes are primarily owned by independent sales distributors who
purchase the exclusive right to sell and distribute Tastykake® products in
defined geographical territories.  When the Company sells routes to
independent sales distributors, it recognizes a gain or loss on the
sale.  Routes sold by the Company are either existing routes that the
Company has previously purchased from an independent sales distributor or newly
established routes in new geographies. Any gain or loss recorded by the Company
is based on the difference between the sales price and the carrying value of the
route.  The Company recognizes gains or losses on sales of routes
because all material services or conditions related to the sale have been
substantially performed or satisfied by the Company as of the date of the
sale.  In most cases, the Company will finance a portion of the
purchase price with interest bearing notes, which are required to be repaid in
full.  Interest rates on the notes are based on Treasury or LIBOR
yields plus a spread.  The Company has no obligation to later
repurchase a route but may choose to do so to facilitate a change in route
ownership.
 
 6
  Sales
distribution routes owned by the Company are considered to have an indefinite
life and are reviewed for impairment at least annually or whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable.   Any potential impairment of the net carrying value
is fully reserved when identified.  As of March 28, 2009 and December
27, 2008, the net carrying value of sales distribution routes owned by the
Company was $1.9 million.
 
 Cash
and Cash Equivalents
 The
Company considers all investments with an original maturity of three months or
less on their acquisition date to be cash equivalents.  Cash
overdrafts are recorded within current liabilities.  Cash flows
associated with cash overdrafts are classified as financing
activities.
 
 Inventory
Valuation
 Inventories,
which include material, labor and manufacturing overhead, are stated at the
lower of cost or market, cost being determined using the first-in, first-out
(“FIFO”) method.  Inventory balances for raw materials, work in
progress and finished goods are regularly analyzed and provisions for excess and
obsolete inventory are recorded, as necessary, based on the forecast of product
demand and production requirements.
 
 Property
and Depreciation
 Property,
plant and equipment are carried at cost.  Depreciation is computed by
the straight-line method over the estimated useful lives of the
assets.  Buildings and improvements, machinery and equipment, and
vehicles are depreciated over thirty-nine years, seven to fifteen years, and
five to ten years, respectively, except where a shorter useful life is
necessitated by the Company’s decision to relocate its Philadelphia
operations.  Spare parts are capitalized as part of machinery and
equipment and are expensed as utilized or capitalized as part of the relevant
fixed asset.  Spare parts are valued using a moving average method and
are reviewed for potential obsolescence on a regular basis.  Reserves
are established for all spare parts that are no longer usable and have no fair
market value.  Capitalized computer hardware and software is
depreciated over five years.
 
 Costs of
major additions, replacements and betterments are capitalized, while maintenance
and repairs, which do not improve or extend the life of the respective assets,
are expensed as incurred.  For significant projects, the Company
capitalizes interest and labor costs associated with the construction and
installation of plant and equipment and significant information technology
development projects.
 
 In
accordance with Statement of Financial Accounting Standards No.144, Accounting for the Impairment or
Disposal of Long-Lived
Assets(“FAS 144”), long-lived assets are reviewed for impairment at
least annually or whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable.  In instances where the
carrying amount may not be recoverable, the review for potential impairment
utilizes estimates and assumptions of future cash flows directly related to the
asset.  For assets where there is no plan for future use, the review
for impairment includes estimates and assumptions of the fair value of the
asset, which is based on the best information available.  These assets
are recorded at the lower of their book value or fair value.
 
 The
Company has a conditional asset retirement obligation related to asbestos in its
Philadelphia manufacturing facility.  As a result of the Company’s
decision in May 2007 to relocate its Philadelphia operations, it was able to
estimate a settlement date for the asset retirement obligation and in accordance
with FASB Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations, recorded an obligation of $6.6 million which was
the present value of the future obligation.  This obligation will
continue to accrete to the full value of the future obligation over the
remaining period until settlement of the obligation which is expected to occur
in June 2010, while the capitalized asset retirement cost is depreciated through
December 2044, the remaining useful life of the Philadelphia manufacturing
facility.  During the quarter ended March 28, 2009 and March 29, 2008,
the Company recorded $0.1 million in interest associated with the asset
retirement obligation and as of March 28, 2009 and December 27, 2008, the asset
retirement obligation totaled $7.1 million and $7.0 million,
respectively.
 
 Grants
 The
Company receives grants from various government agencies for employee training
purposes.  Expenses for the training are recognized in the Company’s
Statement of Operations at the time the training takes place.  When
the proper approvals are given and funds are received from the government
agencies, the Company records an offset to the training expense already
recognized.
 
 7
  In 2007,
in connection with the decision to relocate its Philadelphia manufacturing
operations, the Company received a $0.6 million grant from the Department of
Community and Economic Development of the Commonwealth of Pennsylvania
(“DCED”).  The opportunity grant has certain spending, job retention
and nondiscrimination conditions with which the Company must
comply.  The Company accounted for this grant under the deferred
income approach and will amortize the deferred income over the same period as
the useful life of the asset acquired with the grant.  The asset
acquired with the grant is expected to be placed into service when the new
manufacturing facility becomes fully operational in 2010.
 
 In
addition, in 2006, in conjunction with The Reinvestment Funds, Allegheny West
Foundation and the DCED, the Company activated Project Fresh Start (the
“Project”).  The Project is an entrepreneurial development program
that provides an opportunity for qualified minority entrepreneurs to purchase
routes from independent sales distributors.  The source of grant
monies for this program is the DCED.  The grants are used by minority
applicants to partially fund their purchase of an independent sales distribution
route.
 
 Because
the Project’s grant funds merely pass through the Company in its role as an
intermediary, the Company records an offsetting asset and liability for the
total amount of grants as they relate to the Project.  There is no
Statement of Operations impact related to the establishment of, or subsequent
change to, the asset and liability amounts.
 
 Marketing
Costs
 The
Company expenses marketing costs, which include advertising and consumer
promotions, as incurred or as required in accordance with Statement of Position
93-7, Reporting on Advertising
Costs.  Marketing costs are included as a part of selling,
general and administrative expense.
 
 Computer
Software Costs
 The
Company capitalizes certain costs, such as software coding, installation and
testing that are incurred to purchase or create and implement internal use
computer software in accordance with Statement of Position 98-1, Accounting for Costs of Computer
Software Development or Obtained for Internal Use.  The
majority of the Company’s capitalized software relates to the implementation of
the enterprise resource planning and handheld computer systems.
 
 Freight,
Shipping and Handling Costs
 Outbound
freight, shipping and handling costs are included as a part of selling, general
and administrative expense.  Inbound freight, shipping and handling
costs are capitalized with inventory and expensed with cost of
sales.
 
 Pension
Plan
 The
Company’s funding policy for the pension plan is to contribute amounts
deductible for federal income tax purposes plus such additional amounts, if any,
as the Company’s actuarial consultants advise to be
appropriate.  Effective January 1, 2008, the Company is required to
make quarterly contributions under the Pension Protection Act of
2006.  The Company will make four quarterly contributions in 2009
totaling $2.4 million.  As of March 28, 2009, the Company had made one
of the four required contributions.  In 1987 the Company elected to
immediately recognize all gains and losses in excess of the pension corridor,
which is equal to the greater of ten percent of the accumulated pension benefit
obligation or ten percent of the market-related value of plan
assets.
 
 The
Company accrues normal periodic pension expense or income during the year based
upon certain assumptions and estimates from its actuarial
consultants.  These estimates and assumptions include discount rate,
rate of return on plan assets, compensation increases, mortality and employee
turnover.  In addition, the rate of return on plan assets is directly
related to changes in the equity and credit markets, which can be and have
recently been very volatile.  The use of the above estimates and
assumptions, market volatility and the Company’s election to immediately
recognize all gains and losses in excess of its pension corridor in the current
year may cause the Company to experience significant changes in its pension
expense or income from year to year.  Expense or income that falls
outside the corridor is recognized only in the fourth quarter of each
year.
 
 In
accordance with Financial Accounting Standards Board (“FASB”) Statement No. 158,
Employers’ Accounting
for Defined Benefit
Pension and Other Postretirement Plans, the Company maintains a liability
on its Balance Sheet equal to the under-funded status of its defined benefit and
other postretirement benefit plans.
 
 Accounting
for Derivative Instruments
 The
Company has entered into certain variable-to-fixed interest rate swap contracts
and foreign currency forward contracts denominated in Australian Dollars
(“AUD”), primarily to hedge against fluctuations in interest rates or foreign
currency exchange rates.  The Company accounts for derivative
instruments in accordance with FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities(“FAS 133”) and FASB Statement No.
161, Disclosures about
Derivative Instruments and Hedging Activities─An Amendment of FASB Statement No.
133.
 
 8
  Treasury
Stock
 Treasury
stock is stated at cost.  Cost is determined by the FIFO
method.
 
 Accounting
for Income Taxes
 The
Company accounts for income taxes under the asset and liability method, in
accordance with FASB Statement No. 109, Accounting for Income
Taxes.  Deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates in effect when the
differences are expected to be recovered or settled.
 
 Net
Income (Loss) Per Common Share
 Net income
(loss) per common share is presented as basic and diluted earnings per
share.  Net income (loss) per common share – basic is based on the
weighted average number of common shares outstanding during the
period.  Net income (loss) per common share – diluted is based on the
weighted average number of common shares and dilutive potential common shares
outstanding during the period.  Dilution is the result of outstanding
stock options and restricted shares.  For the thirteen weeks ended
March 28, 2009 and March 29, 2008, 499,798 and 575,928 options to purchase
common stock and restricted shares, respectively, were excluded from the net
income (loss) per common share – basic calculation, as they were
anti-dilutive.
 
 Share-based
Compensation
 The
Company accounts for share-based compensation in accordance with FASB Statement
No. 123(R), Share-Based
Payment (“FAS 123(R)”).  Share-based compensation expense
recognized during the current period is based on the value of the portion of
share-based payment awards that is ultimately expected to vest.  The
total value of compensation expense for restricted stock is equal to the closing
market price of Tasty Baking Company shares on the date of grant.  FAS
123(R) requires forfeitures to be estimated at the time of grant in order to
estimate the amount of share-based awards that will ultimately
vest.  The forfeiture rate is based on the Company’s historical
forfeiture experience.  The Company calculated its historical pool of
windfall tax benefits.
 
 Recent
Accounting Statements
 In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“FAS
157”), which creates a single definition of fair value, along with a conceptual
framework to measure fair value and to increase the consistency and the
comparability in fair value measurements and in financial statement
disclosure.  The Company adopted the required provisions of FAS 157,
effective December 30, 2007. The required provisions did not have a material
impact on the Company’s condensed consolidated financial
statements.
 
 In
February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2,
Effective Date of FASB
Statement No. 157.  This FSP
permits a delay in the effective date of FAS 157 to fiscal years beginning
after November 15, 2008, for nonfinancial assets and nonfinancial
liabilities, except for items that are recognized or disclosed at fair value in
the  financial statements on a recurring basis (at least annually).
The delay was intended to allow the Board and constituents additional time to
consider the effect of various implementation issues that had arisen from the
application of FAS 157.  The FASB also issued FSP FAS 157-1,
Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13(“FAS 157-1”), to exclude SFAS 13, Accounting for Leases, and
its related interpretive accounting pronouncements from the scope of
FAS 157 in February 2008.  The Company adopted the provisions of
FSP FAS 157-1 and FSP FAS 157-2 in the quarter ended March 28,
2009.  The required provisions did not have a material impact on the
Company’s condensed consolidated financial statements.
 
 In October
2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not
Active.  This FSP clarifies the application of FAS 157 in
determining the fair values of assets or liabilities in a market that is not
active.  This FSP became effective upon issuance, including prior
periods for which financial statements have not been issued.  The
Company adopted this FSP in the fourth quarter of 2008.  The required
provisions did not have a material impact on the Company’s condensed
consolidated financial statements.
 
 In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement No.
115 (“FAS 159”).  This statement permits, but does not require
entities to measure certain financial instruments and other assets and
liabilities at fair value on an instrument-by-instrument basis and is
irrevocable.  At the adoption date, unrealized gains and losses on
financial assets and liabilities for which the fair value option has been
elected would be reported as a cumulative adjustment to beginning retained
earnings. Unrealized gains and losses due to changes in their fair value must be
recognized in earnings at each subsequent reporting date.  This
statement is effective for fiscal years beginning after November 15,
2007.  Although FAS 159 was adopted December 30, 2007, the Company has
not yet elected the fair value option for any items permitted under FAS
159.
 
 9
  In
December 2007, the FASB issued Statement No. 141 (Revised 2007), Business Combinations
(“FAS 141(R)”). FAS 141(R) significantly changes the accounting for
business combinations in a number of areas including the treatment of contingent
consideration, acquired contingencies, transaction costs, in-process research
and development and restructuring costs.  In addition, under
FAS 141(R), changes in an acquired entity's deferred tax assets and
uncertain tax positions after the measurement period impact income tax
expense.  FAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning after December 15,
2008.  Earlier adoption was prohibited.  The Company adopted
FAS 141 (R) in the quarter ended March 28, 2009.  The required
provisions did not have an impact on the Company’s condensed consolidated
financial statements.
 
 In
December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements—An Amendment of ARB
No. 51 (“FAS 160”), which establishes new accounting and
reporting standards for the noncontrolling interest in a subsidiary, changes in
a parent's ownership interest in a subsidiary and the deconsolidation of a
subsidiary. FAS 160 is effective for fiscal years beginning after
December 15, 2008.  Earlier adoption was
prohibited.  The Company adopted FAS 160 for the quarter ended March
28, 2009.  The required provisions did not have an impact on the
Company’s condensed consolidated financial statements.
 
 In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging
Activities—An Amendment of FASB Statement No. 133(“FAS
161”).  FAS 161 applies to all derivative instruments and related
hedged items accounted for under FAS 133, Accounting for Derivative
Instruments and Hedging
Activities.  It requires entities to provide greater
transparency about (a) how and why an entity uses derivative instruments,
(b) how derivative instruments and related hedged items are accounted for
under FAS 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
results of operations, and cash flows. FAS 161 is effective for fiscal years and
interim periods beginning after November 15, 2008.  The Company
adopted FAS 161 in the quarter ended March 28, 2009.  Because FAS 161
applies only to financial statement disclosures, it did not have a material
impact on the Company’s condensed consolidated financial
statements.
 
 In June
2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
(“FSP 03-6-1”), which classifies unvested share-based payment awards that
contain non-forfeitable rights to dividends or dividend equivalents as
participating securities and requires them to be included in the computation of
earnings per share pursuant to the two-class method described in SFAS No. 128,
Earnings per
Share.  FSP 03-6-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those years and requires all prior period earnings per share data presented to
be adjusted retrospectively.  The Company adopted FSP 03-6-1 for the
quarter ended March 28, 2009.  The required provisions did not have a
material impact on the Company’s condensed consolidated financial
statements.
 
 In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about
Fair Value of Financial
Instruments(“FAS 107-1 and APB 28-1”).  This FSP requires
disclosure about fair value of financial instruments for interim reporting
periods and annual financial statements of publicly traded companies.  FAS
107-1 and APB 28-1 is effective for interim reporting periods ending after June
15, 2009.  Because FAS 107-1 and APB 18-1 applies only to financial
statement disclosures, it will not have a material impact on the Company’s
condensed consolidated financial statements.
 
 In April
2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Indentifying Transactions That Are Not Orderly(“FAS 157-4”).  This FSP provides additional guidance for estimating
fair value in accordance with FASB Statement No. 157 when the volume and level
of activity for the asset or liability have significantly decreased and provides
guidance on identifying circumstances that indicate a transaction is not
orderly.  FAS 157-4 is effective for interim reporting periods ending after
June 15, 2009.  The Company does not expect the adoption of FAS 157-4 to
have a material impact on its condensed consolidated financial
statements.
 
 10
  In April
2009, the FASB issued FSP No. FAS 115-2, Recognition and Presentation of
Other-Than-Temporary Impairments(“FAS 115-2”).  This FSP provides a
framework to perform an other-than-temporary impairment analysis, in compliance
with GAAP, which determines whether the holder of an investment in a debt or
equity security, for which changes in fair value are not regularly recognized in
earnings, should recognize a loss in earnings when the investment is
impaired.  Additionally this FSP amends the other-than-temporary impairment
guidance for debt securities to make the guidance more operational and to
improve the presentation and disclosure of other-than-temporary impairments on
debt and equity securities in the financial statements.   FAS 115-2 is
effective for interim reporting periods ending after June 15, 2009.  The
Company does not expect the adoption of FAS 115-2 to have a material impact on
its condensed consolidated financial statements.
 
 2.      New
Facilities
 
 In May
2007, the Company announced that as part of its comprehensive operational review
of strategic manufacturing alternatives, it entered into an agreement to
relocate its Philadelphia operations to the Philadelphia Navy
Yard.  The bakery lease agreement provides for a 26-year lease for a
345,500 square foot bakery, warehouse and distribution center located on
approximately 25 acres.  Construction of the facility is underway and
is expected to be substantially complete by the end of 2009.  The
Company expects the new facility to be fully operational in 2010.  The
lease provides for no rent payments in the first year of
occupancy.  Rental payments increase from $3.5 million in the second
year of occupancy to $7.2 million in the final year of the lease.  In
accordance with FASB Statement No. 13, Accounting for Leases(“FAS13”),
the Company will recognize the rental expenses associated with the agreement on
a straight-line basis over the term of the agreement.
 
 As part of
this initiative, the Company also entered into a 16-year agreement for $9.5
million in financing at a fixed rate of 8.54% to be used for leasehold
improvements.  This agreement provides for no principal or interest
payments in the first year of occupancy and then requires equal monthly payments
of principal and interest aggregating to $1.2 million annually over the
remainder of the term.
 
 The
Company also entered into an agreement to relocate its corporate headquarters to
the Philadelphia Navy Yard.  This lease agreement provides for
approximately 36,000 square feet of office space.  Construction of the
office space is complete and during mid-April 2009, the Company relocated its
corporate headquarters to the Philadelphia Navy Yard.  The lease,
which commenced in April 2009, will end at the same time as the new bakery
lease.  The lease provides for no rent payments in the first six
months of occupancy.  Rental payments increase from approximately $0.9
million in the second year of occupancy to approximately $1.5 million in the
final year of the lease.  In accordance with FAS 13, the Company will
recognize the rental expenses associated with the agreement on a straight-line
basis over the term of the agreement.
 
 In
connection with these agreements, the Company provided a $1.1 million letter of
credit, which increased to $8.1 million in the beginning of 2009.  The
outstanding amount of the letter of credit will be reduced starting in 2026 and
will be eliminated by the end of the lease term.  As of March 28,
2009, the outstanding letter of credit under this arrangement totaled $8.1
million.
 
 In
connection with these agreements and the related construction of the new
facilities, the Company provided an additional $0.5 million letter of credit,
which increased to $5.6 million in the first quarter of 2009.  The
outstanding amount of the letter of credit will be eliminated in August
2009.  As of March 28, 2009, the outstanding letter of credit under
this arrangement totaled $5.6 million.
 
 In
addition to the facility leases, the Company is purchasing high-tech, modern
baking equipment.  This equipment is designed to increase product
development flexibility and efficiency, while maintaining existing taste and
quality standards.  The investment for this project, in addition to
any costs associated with the agreements described above, is projected to be
approximately $75.0 million through 2010.  In September 2007, the
Company closed on a multi-bank credit facility and low-interest development
loans provided in part by the Commonwealth of Pennsylvania and the Philadelphia
Industrial Development Corporation to finance this investment and refinance the
Company’s existing revolving credit facilities, as well as to provide for
financial flexibility in running the ongoing operations and working capital
needs.
 
 The
Company accounts for disposal and exit activities in accordance with FASB
Statement No. 146, Accounting
for Costs Associated with Exit or Disposal Activities (“FAS 146”) and FAS
144.  To date, the Company has not incurred any material obligations
related to one-time termination benefits, contract termination costs or other
associated costs as described in FAS 146.
 
 11
  The
Company has evaluated the long-lived assets utilized in its Philadelphia
operations for potential impairment or other treatment in accordance with FAS
144.  Based on the commitment to the planned relocation, neither the
assets to be relocated nor the assets to be left in place at the Philadelphia
operations have suffered impairment.  Therefore the estimated fair
value of the asset groups continues to exceed the carrying amount of such asset
groups.  The Company anticipates that long-lived assets utilized in
the Philadelphia operations with an aggregate net book value of approximately
$20.0 million at June 30, 2007 will not be relocated to the new facilities or
sold as a result of the relocation. With respect to the group of assets not
expected to be relocated or sold, certain of the assets included in the group
had previously estimated useful lives that extended beyond the expected project
completion in 2010.  As such, in the quarter ended June 30, 2007, the
Company changed its estimate of the remaining useful lives of such assets to be
consistent with the time remaining until the end of the project, and accounted
for such change in estimate in accordance with FASB Statement No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No.
3.  For the thirteen week periods ended March 28, 2009 and
March 29, 2008, the change in estimated useful lives of these assets resulted in
incremental depreciation of $1.3 million.  The after-tax impact of the
incremental depreciation on net income, net income per common share-basic and
net income per common share-diluted was $0.8 million, $0.10 per share, and $0.10
per share, respectively, for the thirteen week periods ended March 28, 2009 and
March 29, 2008.   The Company expects that the future pre-tax
impact of incremental depreciation resulting from the change in useful lives
will be approximately $1.3 million per quarter through June 2010, when the new
bakery is expected to be fully operational.
 
 As part of
the relocation of its Philadelphia operations, the Company expects to eliminate
approximately 215 positions.  While the Company hopes to achieve this
result through normal attrition and the reduction of contract labor, it is
probable that the Company will incur obligations related to postemployment
benefits accounted for under FASB Statement No. 112, Employers' Accounting for
Postemployment Benefits, an amendment of FASB Statements No.
5 and 43.  During the quarter ended September 27, 2008, the
Company recorded a reserve of $1.7 million for estimated future obligations
related to postemployment benefits associated with the relocation of its
Philadelphia operations.  The cost associated with this reserve was
recorded in other income.
 3.      Inventories
 
 Inventories
are classified as follows (in thousands):
  March 28, 2009
                                                            
                                                            
                                                            Dec. 27, 2008Finished
      goods
                                                            
                                                            $
                                                            3,173
                                                            
                                                            
                                                            $
                                                            2,275Work
      in progress
                                                            
                                                            
                                                            125
                                                            
                                                            
                                                            
                                                            109Raw
      materials and supplies
                                                            
                                                            
                                                            4,585
                                                            
                                                            
                                                            
                                                            4,806$
                                                            7,883
                                                            
                                                            
                                                            $
                                                            7,190
  The
inventory balance has been reduced by reserves for obsolete and slow-moving
inventories of $35,000 as of March 28, 2009.  At December 27, 2008,
there were no reserves established.
  4.      Credit
Facilities
 On
September 6, 2007, the Company entered into a 5 year, $100.0 million secured
credit facility with 4 banks, consisting of a $55.0 million fixed asset line of
credit, a $35.0 million working capital revolver and a $10.0 million
low-interest loan from the agent bank with the Commonwealth of Pennsylvania (the
“Bank Credit Facility”).  The Bank Credit Facility is secured by a
blanket lien on the Company’s assets and contains various non-financial and
financial covenants, including a fixed charge coverage covenant, a maximum
operating leverage ratio covenant, a minimum liquidity ratio covenant and
minimum level of earnings before interest, taxes, depreciation and amortization
(“EBITDA”) covenant.  Interest rates for the fixed asset line of
credit and working capital revolver are indexed to LIBOR and include a spread
above that index from 125 to 325 basis points based upon the Company’s ratio of
debt to EBITDA.  The fixed asset line of credit and the working
capital revolver include commitment fees from 20 to 50 basis points based upon
the Company’s ratio of debt to EBITDA.  The $10.0 million low-interest
loan bears interest at a fixed rate of 5.5% per annum.  In October
2008, the Company amended its Bank Credit Facility to provide for additional
flexibility and to change certain financial covenants, including the minimum
EBITDA requirement as of December 27, 2008 and the maximum operating leverage
ratio as of September 27, 2008 and December 27, 2008 which was necessary to
eliminate an instance of non-compliance.  As of March 28, 2009 and
December 27, 2008, the outstanding balances under the Bank Credit Facility were
$46.6 million and $45.2 million, respectively.
  12
 
 On
September 6, 2007, the Company entered into a 10 year, $12.0 million secured
credit agreement with the PIDC Local Development Corporation (“PIDC Credit
Facility”).  This credit facility bears interest at a blended fixed
rate of 4.5% per annum, participates in the blanket lien on the Company’s assets
and contains customary representations and warranties as well as customary
affirmative and negative covenants essentially similar to those in the Bank
Credit Facility, as amended in October 2008.  Negative covenants
include, among others, limitations on incurrence of liens and secured
indebtedness by the Company and/or its subsidiaries, other than in connection
with the Bank Credit Facility and the MELF Loan 1 and the MELF Loan 2, as
defined below.  As of March 28, 2009 and December 27, 2008, the
outstanding balances under the PIDC Credit Facility were $12.0 million and $3.0
million, respectively.
 
 On
September 6, 2007, the Company entered into a 10 year, $5.0 million Machinery
and Equipment Loan Fund secured loan with the Commonwealth of Pennsylvania
(“MELF Loan 1”).  This loan bears interest at a fixed rate of 5.0% per
annum and contains customary representations and warranties as well as customary
affirmative and negative covenants similar to those in the Bank Credit Facility,
as amended in October 2008.  Negative covenants include, among others,
limitations on incurrence of liens and secured indebtedness by the Company,
other than in connection with the Bank Credit Facility and the PIDC Credit
Facility.  In September 2008, the Company entered into a second 10
year, $5.0 million Machinery and Equipment Loan Fund secured loan with the
Commonwealth of Pennsylvania (“MELF Loan 2”).  The terms and
conditions of MELF Loan 2 are substantially the same as MELF Loan
1.  The Company borrowed $5.0 million under MELF Loan 1 in September
2008 and $5.0 million under MELF Loan 2 in October 2008.  As of March
28, 2009 and December 27, 2008, the aggregate outstanding balance under the MELF
Loan 1 and MELF Loan 2 was $10.0 million.  As of March 28, 2009, the
Company was in compliance with the various non-financial and financial covenants
included in the Bank Credit Facility, the PIDC Credit Facility, the MELF Loan 1
and the MELF Loan 2.
 
 On
September 6, 2007, the Company entered into an agreement which governs the
shared collateral positions under the Bank Credit Facility, the PIDC Credit
Facility, the MELF Loan 1 and the MELF Loan 2 (the “Intercreditor Agreement”),
and establishes the priorities and procedures that each lender has in enforcing
the terms and conditions of each of their respective agreements.  The
Intercreditor Agreement permits the group of banks and their agent bank in the
Bank Credit Facility to have the initial responsibility to enforce the terms and
conditions of the various credit agreements, subject to certain specific
limitations, and allows such bank group to negotiate amendments and waivers on
behalf of all lenders, subject to the approval of each lender.
 
 The
Company has used and expects to continue to utilize proceeds from the Bank
Credit Facility, the PIDC Credit Facility, the MELF Loan 1 and the MELF Loan 2
to finance the Company’s mid-April 2009 move to its corporate headquarters to
the Philadelphia Navy Yard and its planned move of the Philadelphia
manufacturing facility to new facilities to be constructed at the Philadelphia
Navy Yard, along with working capital needs.
 
 5.      Derivative
Instruments
 
 In order
to hedge a portion of the Company’s exposure to changes in interest rates on
debt incurred under its Bank Credit Facility, the Company enters into
variable-to-fixed interest rate swap contracts to fix the interest rates on a
portion of its variable interest rate debt.   These contracts are
accounted for as cash flow hedges in accordance with FASB Statement No. 133,
Accounting for Derivative
Instruments and Hedging Activities(“FAS 133”).  Accordingly,
these derivatives are marked to market and the resulting gains or losses are
recorded in other comprehensive income as an offset to the related hedged asset
or liability.  The actual interest expense incurred, inclusive of the
effect of the hedge in the current period, is recorded in the Statement of
Operations.
 
 In January
2008, the Company entered into an $8.5 million notional value interest rate swap
contract that increases to $35.0 million by April 2010 with a fixed LIBOR rate
of 3.835% that expires on September 5, 2012.  As of March 28, 2009,
the notional value of the swap was $8.5 million.  As of March 28,
2009, the LIBOR rates were subject to an additional credit spread which could
range from 125 basis points to 325 basis points and was equal to 325 basis
points as of that date.  The Company records as an asset or a
liability the cumulative change in the fair market value of the derivative
instrument, and as of March 28, 2009 and December 27, 2008, the Company recorded
a liability of $1.9 million and $1.8 million, respectively.
  13
 
 In May
2008, the Company entered into an $8.0 million notional value interest rate swap
with a fixed LIBOR rate of 2.97% that expires on May 1, 2011.  As of
March 28, 2009, the LIBOR rats were subject to an additional credit spread which
could range from 125 basis points to 325 basis points and was equal to 325 basis
points as of that date.  The Company records as an asset or a
liability the cumulative change in the fair market value of the derivative
instrument, and as of March 28, 2009 and December 27, 2008, the Company recorded
a liability of $0.3 million.
 
 The table
below summarizes the derivative instruments which were designated as cash flow
hedges under FAS No. 133 as of March 28, 2009 (in thousands):
  US $
      Notional
                              Amount
                            
                            
                            Net
      gain (loss)recognized in
      Accumulated Other Comprehensive Income
                            
                            
                            Net
      gain (loss) from Accumulated Other Comprehensive
                              Income
      to Interest ExpenseInterest
      rate swaps
                            
                            $
                            16,500
                            
                            
                            $
                            (157
                            )
                            
                            $
                            (98
                            )
 
 The table
below summarizes the derivative instruments which were designated as cash flow
hedges under FAS No. 133 as of March 29, 2008 (in thousands):
  US $
      Notional
                              Amount
                            
                            
                            Net
      gain (loss) recognized in Accumulated Other Comprehensive
      Income
                            
                            
                            Net
      gain (loss) from Accumulated Other Comprehensive
                              Income
      to InterestExpenseInterest
      rate swaps
                            
                            $
                            8,500
                            
                            
                            $
                            (322
                            )
                            
                            $
                            (8
                            )
 
 As part of
the construction of its new manufacturing facility, the Company entered into
commitments to acquire machinery and equipment denominated in a foreign
currency.  In order to hedge the exposure resulting from changes in
foreign currency rates, the Company entered into foreign currency forward
contracts denominated in Australian Dollars (“AUD”).  These contracts
are accounted for as fair value foreign currency hedges in accordance with FAS
133.  Accordingly, the changes in fair value of both the commitment
and the derivative instruments are recorded currently in the Statement of
Operations, with the corresponding asset and liability recorded on the Balance
Sheet.
 
 As of March 28, 2009 and December 27,
2008, the notional principle of outstanding foreign currency forward contracts
designated as hedges was $3.2 million AUD ($2.3 million USD) and $5.3 million
AUD ($3.6 million USD), respectively.  As of March 28, 2009 and
December 27, 2008, the net change in fair value of both the commitment and the
forward currency contracts was $0.2 million and $0.6 million,
respectively.
 
 Derivative
instruments designated as hedging instruments under FAS No. 133 are reflected in
the Condensed Consolidated Balance Sheets as follows (in
thousands):
 
 March
      28, 2009Balance
      Sheet Location
                    
                    Fair
      valueInterest
      rate swaps
                    Accrued
      other liabilities
                    
                    $
                    (2,246
                    )Foreign
      currency hedges
                    Prepayments
      and other
                    
                    
                    49Foreign
      currency hedges
                    Other
      accrued liabilities
                    
                    
                    (60
                    )Foreign
      currency hedges
                    Accrued
      other liabilities
                    
                    
                    (124
                    )
 
 The
Company holds foreign currency forward contracts, which were originally entered
into to hedge the risk of foreign currency fluctuations associated with
commitments denominated in AUD, however, during the quarter ended
March  28, 2009 these forward contracts were determined to be no
longer designated as hedging instruments.  A summary of the original
derivatives which were de-designated, as well as the new derivatives which
offset the exposure of these derivatives is as follows (in
thousands):
  14
  Foreign Currency Forward
      Contracts
                              
                              US $
      Notional
                                Amount
                              
                              
                              Amount
      of gain (loss) recognized in
                                Accumulated
      Other Comprehensive IncomeBuy
      foreign currency contracts
                              
                              $
                              2,724
                              
                              
                              $
                              (247
                              )Buy
      foreign currency contracts
                              
                              
                              162
                              
                              
                              
                              (18
                              )Buy
      foreign currency contracts
                              
                              
                              162
                              
                              
                              
                              (18
                              )Buy
      foreign currency contracts
                              
                              
                              162
                              
                              
                              
                              (18
                              )Buy
      foreign currency contracts
                              
                              
                              162
                              
                              
                              
                              (19
                              )Buy
      foreign currency contracts
                              
                              
                              162
                              
                              
                              
                              (19
                              )Sell
      foreign currency contracts
                              
                              
                              (1,635
                              )
                              
                              
                              (64
                              )Sell
      foreign currency contracts
                              
                              
                              (1,090
                              )
                              
                              
                              (40
                              )Sell
      foreign currency contracts
                              
                              
                              (486
                              )
                              
                              
                              (19
                              )Sell
      foreign currency contracts
                              
                              
                              (324
                              )
                              
                              
                              (12
                              )Total
      buy/sell foreign currency contracts
                              
                              
                              
                              
                              
                              $
                              (474
                              )
 
 For the
quarter ended March 28, 2009, gains and losses on these derivative instruments,
which net to $0, were included in the Condensed Consolidated Statement of
Operations under the caption “Other Income, net”.
 
 Counterparties
to the foreign currency forward contracts and interest rate swaps are primarily
major banking institutions with credit ratings of investment grade or better and
no collateral is required.  There are no significant risk
concentrations.  The Company believes the risk of incurring losses on
derivative contracts related to credit risk is remote.
 
 6.      Fair
Value Measurements
 
 As
described in Note 1, the Company adopted FAS 157 on December 30,
2007.  FAS 157, among other things, defines fair value, establishes a
consistent framework for measuring fair value and expands disclosure for each
major asset and liability category measured at fair value on either a recurring
or nonrecurring basis.  FAS 157 clarifies that fair value is an exit
price, representing the amount that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants.  As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or a liability.  As a basis for considering such assumptions,
FAS 157 establishes a three-tier fair value hierarchy, which prioritizes the
inputs used in measuring fair value as follows:
  Level
      1.
              
              Observable
      inputs such as quoted prices in active markets for identical assets or
      liabilities;Level
      2.
              
              Inputs,
      other than quoted prices included within Level 1, that are observable
      either directly or indirectly; andLevel
      3.
              
              Unobservable
      inputs in which there is little or no market data, which require the
      reporting entity to develop its own
assumptions.
 
 The
following table presents assets / (liabilities) measured at fair value on a
recurring basis at March 28, 2009 (in thousands):
 
 Fair
      Value Measurement at Reporting Date UsingDescription
                                                                  
                                                                  Balance
      as of March 28, 2009
                                                                  
                                                                  
                                                                  Quoted
      Prices in Active Markets for Identical Assets (Level 1)
                                                                  
                                                                  
                                                                  Significant
                                                                    Other
                                                                    Observable
                                                                    Inputs
      (Level 2)
                                                                  
                                                                  
                                                                  Significant
      Unobservable Inputs (Level 3)Financial
      instruments owned:Interest
      rate swaps
                                                                  
                                                                  $
                                                                  (2,246
                                                                  )
                                                                  
                                                                  $
                                                                  —
                                                                  
                                                                  
                                                                  $
                                                                  (2,246
                                                                  )
                                                                  
                                                                  $
                                                                  —Foreign
      currency forward contracts
                                                                  
                                                                  
                                                                  (474
                                                                  )
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  (474
                                                                  )
                                                                  
                                                                  
                                                                  —Foreign
      currency hedges
                                                                  
                                                                  
                                                                  49
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  49
                                                                  
                                                                  
                                                                  
                                                                  —Foreign
      currency hedges
                                                                  
                                                                  
                                                                  (184
                                                                  )
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  (184
                                                                  )
                                                                  
                                                                  
                                                                  —Total
      financial instruments owned
                                                                  
                                                                  $
                                                                  (2,855
                                                                  )
                                                                  
                                                                  $
                                                                  —
                                                                  
                                                                  
                                                                  $
                                                                  (2,855
                                                                  )
                                                                  
                                                                  $
                                                                  —
  15
 The
following table presents assets / (liabilities) measured at fair value on a
recurring basis at December 27, 2008 (in thousands):
 
 Fair
      Value Measurement at Reporting Date UsingDescription
                                                          
                                                          Balance
      as of
                                                            Dec.
      27, 2008
                                                          
                                                          
                                                          Quoted
      Prices in Active Markets for Identical Assets (Level 1)
                                                          
                                                          
                                                          Significant
                                                            Other
                                                            Observable
                                                            Inputs(Level
      2)
                                                          
                                                          
                                                          Significant
      Unobservable Inputs(Level
      3)Financial
      instruments owned:Interest
      rate swaps
                                                          
                                                          $
                                                          (2,089
                                                          )
                                                          
                                                          $
                                                          —
                                                          
                                                          
                                                          $
                                                          (2,089
                                                          )
                                                          
                                                          $
                                                          —Foreign
      currency hedges
                                                          
                                                          
                                                          (585
                                                          )
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          (585
                                                          )
                                                          
                                                          
                                                          —Total
      financial instruments owned
                                                          
                                                          $
                                                          (2,674
                                                          )
                                                          
                                                          $
                                                          —
                                                          
                                                          
                                                          $
                                                          (2,674
                                                          )
                                                          
                                                          $
                                                          —
 
 7.      Defined
Benefit Retirement Plans
 
 The
Company maintains a partially funded noncontributory Defined Benefit (“DB”)
Retirement Plan (the “DB Plan”) providing retirement
benefits.  Benefits under this DB Plan generally are based on the
employees’ years of service and compensation during the years preceding
retirement.  In December 2004, the Company announced to its employees
that it was amending the DB Plan to freeze benefit accruals effective March 26,
2005.   The Company maintains a DB Supplemental Executive
Retirement Plan (“SERP”) for key employees designated by the Board of Directors
(the “Board”), however, there are no current employees earning benefits under
this plan.  See Note 8 for more information.  The Company
also maintains a frozen unfunded Retirement Plan for Directors (the “Director
Plan”).  The benefit amount is the annual cash retainer in the year of
retirement.
 
 Effective
February 15, 2007, benefit accruals under the Directors’ Retirement Plan were
frozen for current directors and future directors were precluded from
participating in the plan.  Participants are credited for service
under the Director Retirement Plan after February 15, 2007 solely for vesting
purposes.  On February 15, 2007, the Board approved a Deferred Stock
Unit Plan (the “DSU Plan”).  The DSU Plan provides that for each
fiscal quarter, the Company will credit DSUs to the director’s account
equivalent in value to $4,000 on the last day of such quarter, provided that he
or she is a director on the last day of such quarter.  Directors will
be entitled to be paid in shares upon termination of Board service provided the
director has at least five years of continuous service on the
Board.  The shares may be paid out in a lump sum or at the director’s
election, over a period of five years.
 
 The
components of the DB Plan, DB SERP, and DB Directors’ Retirement Plan’s costs
are summarized as follows (in thousands):
  Thirteen
      Weeks Ended3/28/09
                                                                        
                                                                        
                                                                        3/29/08Service
      cost-benefits earned during the quarter
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        $
                                                                        -Interest
      cost on projected benefit obligation
                                                                        
                                                                        
                                                                        1,246
                                                                        
                                                                        
                                                                        
                                                                        1,234Expected
      return on plan assets
                                                                        
                                                                        
                                                                        (959
                                                                        )
                                                                        
                                                                        
                                                                        (1,301
                                                                        )Prior
      service cost amortization
                                                                        
                                                                        
                                                                        (4
                                                                        )
                                                                        
                                                                        
                                                                        (4
                                                                        )Actuarial
      loss recognition
                                                                        
                                                                        
                                                                        13
                                                                        
                                                                        
                                                                        
                                                                        16Net
      DB pension amount charged to income (expense)
                                                                        
                                                                        $
                                                                        296
                                                                        
                                                                        
                                                                        $
                                                                        (55
                                                                        )
 Under the
Pension Protection Act of 2006, the Company made a $0.6 million contribution to
the previously frozen DB Plan for the quarter ended March 28,
2009.  During 2009, the Company will make four quarterly cash
contributions. There is an aggregate minimum required cash contribution to the
DB Plan in fiscal 2009 of $2.4 million.
 8.      Defined
Contribution Retirement Plans
 
 The
Company maintains a funded Defined Contribution (“DC”) Retirement Plan (the “DC
Plan”), which replaced the benefits provided in the DB Plan.  Under
the DC Plan, the Company makes weekly cash contributions into individual
accounts for all eligible employees.  These contributions are based on
employees’ point values which are the sum of age and years of service as of
January 1 each year.  All employees receive contributions that range
from 2.0% to 5.0% of covered compensation relative to their point
totals.  Employees at March 27, 2005, who had 20 years of service or
10 years of service and 60 points, received an additional “grandfathered”
contribution of between 1.5% and 3.5% of salary. The
“grandfathered” contribution percentage was fixed as of March 27, 2005, and is
paid weekly with the regular contribution until those covered employees retire
or separate from the Company.  These “grandfathered” contributions are
being made to compensate older employees for the shorter earnings period that
their accounts will have to appreciate in value relative to their normal
retirement dates.
  16
  The
Company also maintains the Tasty Baking Company 401(k) and the Company Funded
Retirement Plan (the “Retirement Plan”).  In the Retirement Plan, all
participants receive a Company match of 50.0% of their elective deferrals that
do not exceed 4.0% of their compensation as defined in the Retirement
Plan.  Under the Retirement Plan, the waiting period for participation
has been eliminated and participants are offered a broad array of investment
choices.
 
 The
Company also maintains an unfunded defined contribution SERP (“DC SERP”) for one
eligible active employee.
 
 Components
of DC pension amounts charged to income (in thousands):
  Thirteen
      Weeks Ended3/28/09
                                                      
                                                      
                                                      3/29/08Funded
      retirement plan
                                                      
                                                      $
                                                      443
                                                      
                                                      
                                                      $
                                                      482Defined
      contribution SERP
                                                      
                                                      
                                                      72
                                                      
                                                      
                                                      
                                                      97Net
      DC pension amount charged to income
                                                      
                                                      $
                                                      515
                                                      
                                                      
                                                      $
                                                      579
  9.      Postretirement
Benefits Other than Pensions
 
 In
addition to providing pension benefits, the Company has historically provided
certain unfunded health care and life insurance programs for substantially all
retired employees, or Other Postretirement Benefits (OPEB).  These
benefits have been provided through contracts with insurance companies and
health service providers.
 
 With the
implementation of Medicare Part D in January 2006, the Company stopped providing
medical benefits for most of its post-65 retirees and began requiring incumbent
retirees to pay age-based rates for life insurance benefits in excess of
$20,000.  Since January 2006, the Company has provided subsidized
medical benefits for its retirees and their dependents who had not yet reached
age 65.  In December of 2008, the Company made the decision to
terminate its retiree medical benefit plan, which offered medical insurance to
pre-65 retirees at a subsidized rate.  The decision to terminate the
plan was made prior to December 27, 2008 and the Company set the benefits’
cessation date as December 1, 2009.  This plan amendment and
curtailment resulted in the Company recording $7.8 million in income in the
fourth quarter of 2008.  Approximately $4.7 million of the $7.8
million in income was recorded in fixed manufacturing costs, with the remainder
of approximately $3.1 million recorded as a component of selling, general and
administrative expenses.
 
 Life
insurance for individuals retiring before January 1, 2006 at Company group rates
is capped at $20,000 of coverage.  Incumbent retirees who purchase
coverage in excess of $20,000 and all new retirees after January 1, 2006 pay age
based rates for their life insurance benefit for which the Company incurs no
liability.
 
 Components
of net periodic postretirement benefit cost (benefit) (in
thousands):
  Thirteen
      Weeks Ended3/28/09
                                                          
                                                          
                                                          3/29/08Service
      cost
                                                          
                                                          $
                                                          -
                                                          
                                                          
                                                          $
                                                          91Interest
      cost
                                                          
                                                          
                                                          43
                                                          
                                                          
                                                          
                                                          116Amortization
      of unrecognized prior service cost
                                                          
                                                          
                                                          (199
                                                          )
                                                          
                                                          
                                                          (458
                                                          )Amortization
      of unrecognized gain
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -Total
      FAS 106 net postretirement benefit
                                                          
                                                          $
                                                          (156
                                                          )
                                                          
                                                          $
                                                          (251
                                                          )
  Estimated
company contributions for the thirteen weeks ended March 28, 2009 and March 29,
2008 were $0.4 million and $0.2 million, respectively.
 
 17
 
 10.           Stock
Compensation
 
 At the
2006 Annual Meeting of Shareholders of the Company held on May 11, 2006, the
Company's shareholders approved the Tasty Baking Company 2006 Long-Term
Incentive Plan (the "2006 Plan") as adopted by the Board on March 24,
2006.  The aggregate number of shares available for grant under the
Plan is 120,600 shares of the Company’s common stock as of March 28,
2009.
 
 The 2006
Plan authorizes the Compensation Committee (the "Committee") of the Board to
grant awards of stock options, stock appreciation rights, unrestricted stock,
restricted stock (“RSA”) (including performance restricted stock) and
performance shares to employees, directors and consultants or advisors of the
Company.  The option price is determined by the Committee and, in the
case of incentive stock options, will be no less than the fair market value of
the shares on the date of grant.  Options lapse at the earlier of the
expiration of the option term specified by the Committee (not more than ten
years in the case of incentive stock options) or three months following the date
on which employment with the Company terminates.
 
 The
Company also has an active 2003 Long-Term Incentive Plan (the “2003
Plan”).  The aggregate number of shares available for grant under the
2003 Plan is 42,478 as of March 28, 2009.  The terms and conditions of
the 2003 plan are generally the same as the 2006 Plan.  A notable
difference is that the 2003 Plan can only award shares to employees and
directors of the Company.  The Company also has options outstanding
under the 1994 and the 1997 Long-Term Incentive Plans.
 
 Notwithstanding
the vesting and termination provisions described above, under the terms of the
Change of Control Agreements and Employment Agreements that the Company entered
into with certain executive officers, upon a change of control, the shares
granted as RSAs vest and any restrictions on outstanding stock options lapse
immediately.  Additionally, under the terms of those agreements, in
certain change of control circumstances, shares granted as RSAs may vest after
termination of employment.
 
 A summary
of stock options as of March 28, 2009, is presented below:
  Shares
      (000’s)
                                                                
                                                                
                                                                Weighted
      Average
                                                                  Exercise
      Price
                                                                
                                                                
                                                                Weighted
      Average
                                                                  Remaining
                                                                  Contractual
      Term
                                                                
                                                                
                                                                Aggregate
      Intrinsic
                                                                  Value
      (000s)Outstanding
      at Dec. 27, 2008
                                                                
                                                                
                                                                322
                                                                
                                                                
                                                                $
                                                                10.38Granted
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -Forfeited
                                                                
                                                                
                                                                (5
                                                                )
                                                                
                                                                
                                                                11.50
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                -Exercised
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -Outstanding
      at March 28, 2009
                                                                
                                                                
                                                                317
                                                                
                                                                
                                                                $
                                                                10.36
                                                                
                                                                
                                                                
                                                                4.12
                                                                
                                                                
                                                                $
                                                                765Options
      exercisable at March 28, 2009
                                                                
                                                                
                                                                317
                                                                
                                                                
                                                                $
                                                                10.36
                                                                
                                                                
                                                                
                                                                4.12
                                                                
                                                                
                                                                $
                                                                765
  As of
March 28, 2009, there was no unrecognized compensation related to nonvested
stock options, as all options are fully vested.  For the thirteen
weeks ended March 28, 2009, there were no options granted and there was no cash
received from option exercises.  There was no compensation expense
recognized in the Condensed Consolidated Statements of Operations for stock
options in the thirteen weeks ended March 28, 2009 or March 29,
2008.
 
 The
Company recognizes expense for restricted stock using the straight-line method
over the requisite service period.  A summary of the restricted stock
as of March 28, 2009, is presented below:
  Shares
      (000’s)
                                                          
                                                          
                                                          
                                                          Weighted
      Average
                                                            Fair
      ValueNonvested
      at December 27, 2008
                                                          
                                                          417
                                                          
                                                          
                                                          $
                                                          6.07Granted
                                                          
                                                          100
                                                          
                                                          
                                                          
                                                          4.08Forfeited
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -Exercised
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -Nonvested
      at March 28, 2009
                                                          
                                                          517
                                                          
                                                          
                                                          $
                                                          5.69
 As of
March 28, 2009, there was $1.8 million of unrecognized compensation cost related
to nonvested restricted stock which is expected to be recognized over a weighted
average period of approximately 2.67 years.
  18
 11.           Income
Taxes
 
 
 The
Company’s effective tax rate was 20.8% and 24.5% for the thirteen weeks ended
March 28, 2009 and March 29, 2008, respectively.  The Company’s
effective tax rate can differ from the composite federal and state statutory tax
rate due to certain expenses which are not deductible for income tax purposes
and non-recurring discrete items.  Non-deductible expense items and
discrete items tend to increase the effective tax rate when pre-tax income is
reported and tend to decrease the effective tax rate when a pre-tax loss is
reported.  For the thirteen weeks ended March 29, 2008, the Company
recorded $0.2 million in non-recurring discrete expense items related to the
write-off of charitable contribution carryforwards.
 
 12.           Accumulated
Other Comprehensive Income (Loss)
 
  Total
comprehensive income (loss), net of taxes, is comprised as follows (in
thousands):
  Thirteen Weeks
      Ended3/28/09
                                                
                                                
                                                3/29/08Net
      income (loss)
                                                
                                                $
                                                (70
                                                )
                                                
                                                $
                                                (959
                                                )Other
      comprehensive income (loss)Pension
      plan
                                                
                                                
                                                5
                                                
                                                
                                                
                                                7Other
      postretirement benefits
                                                
                                                
                                                (251
                                                )
                                                
                                                
                                                (275
                                                )Change
      in unrealized gain (loss)on
      derivative instruments
                                                
                                                
                                                (75
                                                )
                                                
                                                
                                                (193
                                                )Total
      other comprehensive income (loss)
                                                
                                                
                                                (321
                                                )
                                                
                                                
                                                (461
                                                )Total
      comprehensive income (loss)
                                                
                                                $
                                                (391
                                                )
                                                
                                                $
                                                (1,420
                                                )
  The
following table summarizes the components of accumulated other comprehensive
income (loss), net of tax (in thousands):
  Mar.
      28,
                                          2009
                                        
                                        
                                        Dec.
      27,
                                          2008Pension
      plan
                                        
                                        $
                                        (5,322
                                        )
                                        
                                        $
                                        (5,327
                                        )Unrealized
      gain (loss) on derivative instruments
                                        
                                        
                                        (1,347
                                        )
                                        
                                        
                                        (1,273
                                        )Other
      postretirement benefits
                                        
                                        
                                        749
                                        
                                        
                                        
                                        1,001Total
      comprehensive income (loss)
                                        
                                        $
                                        (5,920
                                        )
                                        
                                        $
                                        (5,599
                                        )
  19
 Item 2.     Management’s Discussion and
Analysis of Financial Condition and Results of Operation
 All
disclosures are pre-tax, unless otherwise noted.
 
 Results of
Operations
 
 For
the Thirteen Weeks ended March 28, 2009
 
 Overview
 
 Net loss
for the first quarter of 2009 was $0.1 million or $0.01 per fully-diluted share
as compared to a net loss of $1.0 million of $0.12 per fully-diluted share in
the first quarter of 2008.  Net loss for the first quarter of both
2009 and 2008 included $0.8 million, or $0.10 per common share, of incremental
depreciation, after-tax, resulting from the change in the estimated useful lives
of certain assets at the Company’s Philadelphia operations in the second quarter
of fiscal 2007.  The change in estimated useful lives resulted from
the Company’s plans to move from its present Philadelphia manufacturing and
distribution facilities.
 
 Sales
 
 Gross
sales increased 11.0% in the first quarter of 2009 on a volume increase of 2.4%
compared to the same period in the prior year.  Net sales in the first
quarter of 2009 increased 7.8% versus the comparable period in 2008 driven by a
3.6% increase in Non-Route net sales and a 9.1% increase in Route net
sales.  Route net sales benefited from higher volumes, increased
selling prices, and balanced performance across all major product categories, as
well as changes in the Company’s promotional strategy.  In addition,
the increase in Route net sales was partially attributable to the shift in the
timing of the Easter holiday to the second quarter of 2009 from its occurrence
in the first quarter of 2008 .  Non-Route net sales increased due to
higher sales volumes with third-party distributors, as well as the impact from
higher selling prices in the first quarter of 2009, as compared to the prior
year.
 
 Cost
of Sales
 
 Cost of
sales for the first quarter of 2009 increased 3.9% versus the first quarter of
2008 on a unit volume increase of 2.4%.  The increase in cost of sales
was driven by the impact of higher volume in the first quarter of 2009 as
compared to the same period in 2008, combined with a $0.6 million increase in
variable manufacturing expenses, including higher packaging and ingredient
costs.
 
 Gross
Margin
 
 Gross
margin increased 2.5 percentage points to 28.2% of net sales in the first
quarter of 2009 from 25.7% of net sales in the first quarter of
2008.  The increase in gross margin was primarily attributable to
higher product selling price which contributed approximately 4.3 percentage
points of gross margin improvement over the first quarter of
2008.  Partially offsetting the increase were higher variable
manufacturing costs, including packaging and ingredient costs, as well as higher
depreciation expense resulting from investments associated with the transition
to the new manufacturing and distribution facility.
 
 Selling,
General and Administrative Expenses
 
 Selling,
general and administrative expense in the first quarter of 2009 increased 5.7%
or $0.7 million versus the comparable period in 2008.  This increase
was primarily due to higher incentive compensation costs, including equity based
compensation, as compared to the same period in the prior year.  When
measured as a percentage of net sales, selling, general and administrative
expenses declined to 27.5% in the first quarter of 2009 compared to 28.1% in the
same quarter of 2008.
 
 Interest
 
 Interest
expense increased by $0.1 million to $0.6 million in the first quarter of 2009
from $0.5 million in the first quarter of 2008, primarily due to increased
interest expense associated with borrowings related to expenditures for the
Company’s new manufacturing facility.   The Company is exposed to
market risk relative to its interest expense as certain of its notes payable and
long-term debt have floating interest rates that vary with the conditions of the
credit market.
 
 20
  Other
(Income) Expense
 
 Other
income, net, remained relatively constant at $0.2 million in the first quarter
of 2009 compared to the first quarter of 2008.
 
 Taxes
 
 The
effective income tax rate for state and federal taxes was 20.8% and 24.5% for
the thirteen weeks ended March 28, 2009 and March 29, 2008,
respectively.  For the quarter ended March 29, 2008, the Company
recorded $0.2 million in non-recurring discrete expense items related to the
write-off of charitable contribution carryforwards.
 
 Liquidity
and Capital Resources
 
 Current
assets at March 28, 2009 were $37.6 million compared to $34.7 million at
December 27, 2008, and current liabilities at March 28, 2009 were $30.1 million
compared to $23.7 million at December 27, 2008.   The increase in
current assets was driven by an increase in accounts receivable of $1.4 million
resulting from higher sales as compared to the prior quarter as well as a $0.8
million increase in prepayments and a $0.7 million increase in inventories. The
$6.4 million increase in current liabilities was due to an increase in accounts
payable of $5.1 million resulting primarily from an increase in obligations
related to the construction of the Company’s new manufacturing and distribution
facility.
 
 During
2009, the Company expects to make payments on its long-term debt obligations
incurred in connection with the Company’s new manufacturing and distribution
facility of approximately $1.8 million.  During the first quarter of
2009, the Company made payments on long-term debt of approximately $0.5
million.  In addition, during fiscal 2009 the Company is required,
under the Pension Protection Act of 2006, to make $2.4 million in quarterly cash
contributions of $0.6 million to the DB Plan.
 
 In May
2007, the Company announced that as part of its comprehensive operational review
of strategic manufacturing alternatives, it entered into an agreement to
relocate its Philadelphia operations to the Philadelphia Navy
Yard.  The bakery lease agreement provides for a 26-year lease for a
345,500 square foot bakery, warehouse and distribution center located on
approximately 25 acres.  Construction of the facility is underway and
is expected to be substantially complete by the end of 2009.  The
Company expects the new facility to be fully operational in 2010.  The
lease provides for no rent payments in the first year of
occupancy.  Rental payments increase from $3.5 million in the second
year of occupancy to $7.2 million in the final year of the lease.  In
accordance with FASB Statement No. 13, Accounting for Leases(“FAS13”),
the Company will recognize the rental expenses associated with the agreement on
a straight-line basis over the term of the agreement.
 
 As part of
this initiative, the Company also entered into a 16-year agreement for $9.5
million in financing at a fixed rate of 8.54% to be used for leasehold
improvements.  This agreement provides for no principal or interest
payments in the first year of occupancy and then requires equal monthly payments
of principal and interest aggregating to $1.2 million annually over the
remainder of the term.
 
 The
Company also entered into an agreement to relocate its corporate headquarters to
the Philadelphia Navy Yard.  This lease agreement provides for
approximately 36,000 square feet of office space.  Construction of the
office space is complete and during mid-April 2009, the Company relocated its
corporate headquarters to the Philadelphia Navy Yard.  The lease,
which commenced in April 2009, will end at the same time as the new bakery
lease.  The lease provides for no rent payments in the first six
months of occupancy.  Rental payments increase from approximately $0.9
million in the second year of occupancy to approximately $1.5 million in the
final year of the lease.  In accordance with FAS 13, the Company will
recognize the rental expenses associated with the agreement on a straight-line
basis over the term of the agreement.
 
 In
connection with these agreements, the Company provided a $1.1 million letter of
credit, which increased to $8.1 million in the beginning of 2009.  The
outstanding amount of the letter of credit will be reduced starting in 2026 and
will be eliminated by the end of the lease term.  As of March 28,
2009, the outstanding letter of credit under this arrangement totaled $8.1
million.
 
 In
connection with these agreements and the related construction of the new
facilities, the Company provided an additional $0.5 million letter of credit,
which increased to $5.6 million in the first quarter of 2009.  The
outstanding amount of the letter of credit will be eliminated in August
2009.  As of March 28, 2009, the outstanding letter of credit under
this arrangement totaled $5.6 million.
 
 21
  In
addition to the facility leases, the Company is purchasing high-tech, modern
baking equipment.  This equipment is designed to increase product
development flexibility and efficiency, while maintaining existing taste and
quality standards.  The investment for this project, in addition to
any costs associated with the agreements described above, is projected to be
approximately $75.0 million through 2010.  In September 2007, the
Company closed on a multi-bank credit facility and low-interest development
loans provided in part by the Commonwealth of Pennsylvania and the Philadelphia
Industrial Development Corporation to finance this investment and refinance the
Company’s existing revolving credit facilities, as well as to provide for
financial flexibility in running the ongoing operations and working capital
needs.
 
 Cash
and Cash Equivalents
 
 Historically,
the Company has been able to generate sufficient amounts of cash from
operations.  Bank borrowings are used to supplement cash flow from
operations during periods of cyclical shortages.  The Company
maintains a Bank Credit Facility, a PIDC Credit Facility, a MELF Loan 1 and
a MELF Loan 2, as defined below, and utilizes certain capital and operating
leases.
 
 Cash
overdrafts are recorded within current liabilities.  Cash flows
associated with cash overdrafts are classified as financing
activities.
 
 On
September 6, 2007, the Company entered into a 5 year, $100.0 million secured
credit facility with 4 banks, consisting of a $55.0 million fixed asset line of
credit, a $35.0 million working capital revolver and a $10.0 million
low-interest loan from the agent bank with the Commonwealth of Pennsylvania (the
“Bank Credit Facility”).  The Bank Credit Facility is secured by a
blanket lien on the Company’s assets and contains various non-financial and
financial covenants, including a fixed charge coverage covenant, a maximum
operating leverage ratio covenant, a minimum liquidity ratio covenant and
minimum level of earnings before interest, taxes, depreciation and amortization
(“EBITDA”) covenant.  Interest rates for the fixed asset line of
credit and working capital revolver are indexed to LIBOR and include a spread
above that index from 125 to 325 basis points based upon the Company’s ratio of
debt to EBITDA.  The fixed asset line of credit and the working
capital revolver include commitment fees from 20 to 50 basis points based upon
the Company’s ratio of debt to EBITDA.  The $10.0 million low-interest
loan bears interest at a fixed rate of 5.5% per annum.  In October
2008, the Company amended its Bank Credit Facility to provide for additional
flexibility and to change certain financial covenants, including the minimum
EBITDA requirement as of December 27, 2008 and the maximum operating leverage
ratio as of September 27, 2008 and December 27, 2008 which was necessary to
eliminate an instance of non-compliance.
 
 On
September 6, 2007, the Company entered into a 10 year, $12.0 million secured
credit agreement with the PIDC Local Development Corporation (“PIDC Credit
Facility”).  This credit facility bears interest at a blended fixed
rate of 4.5% per annum, participates in the blanket lien on the Company’s assets
and contains customary representations and warranties as well as customary
affirmative and negative covenants essentially similar to those in the Bank
Credit Facility, as amended in October 2008.  Negative covenants
include, among others, limitations on incurrence of liens and secured
indebtedness by the Company and/or its subsidiaries, other than in connection
with the Bank Credit Facility and the MELF Loan 1 and the MELF Loan 2, as
defined below.
 
 On
September 6, 2007, the Company entered into a 10 year, $5.0 million Machinery
and Equipment Loan Fund secured loan with the Commonwealth of Pennsylvania
(“MELF Loan 1”).  This loan bears interest at a fixed rate of 5.0% per
annum and contains customary representations and warranties as well as customary
affirmative and negative covenants similar to those in the Bank Credit Facility,
as amended in October 2008.  Negative covenants include, among others,
limitations on incurrence of liens and secured indebtedness by the Company,
other than in connection with the Bank Credit Facility and the PIDC Credit
Facility. In September 2008, the Company entered into a second 10 year, $5.0
million Machinery and Equipment Loan Fund secured loan with the Commonwealth of
Pennsylvania (“MELF Loan 2”).  The terms and conditions of MELF Loan 2
are substantially the same as MELF Loan 1.  The Company borrowed $5.0
million under MELF Loan 2 in October 2008.  As of March 28, 2009, the
Company was in compliance with the various non-financial and financial covenants
included in the Bank Credit Facility, the PIDC Credit Facility, the MELF Loan 1
and the MELF Loan 2.
 
 On
September 6, 2007, the Company entered into an agreement which governs the
shared collateral positions under the Bank Credit Facility, the PIDC Credit
Facility, the MELF Loan 1 and the MELF Loan 2 (the “Intercreditor Agreement”),
and establishes the priorities and procedures that each lender has in enforcing
the terms and conditions of each of their respective agreements.  The
Intercreditor Agreement permits the group of banks and their agent bank in the
Bank Credit Facility to have the initial responsibility to enforce the terms and
conditions of the various credit agreements, subject to certain specific
limitations, and allows such bank group to negotiate amendments and waivers on
behalf of all lenders, subject to the approval of each lender.
 
 22
  In order
to hedge a portion of the Company’s exposure to changes in interest rates on
debt associated with the Company’s new manufacturing facilities, the Company
entered into certain variable-to-fixed interest rate swap contracts to fix the
interest rates on a portion of its variable interest rate debt.  In
January 2008, the Company entered into an $8.5 million notional value interest
rate swap contract that increases to $35.0 million by April 2010 with a fixed
LIBOR rate of 3.835% that expires on September 5, 2012.  As of March
28, 2009, the notional value of the swap was $8.5 million.  As of
March 28, 2009, the LIBOR rates were subject to an additional credit spread
which could range from 125 basis points to 325 basis points and was equal to 325
basis points as of that date.  The Company records as an asset or
liability the cumulative change in the fair market value of the derivative
instrument, and as of March 28, 2009, the Company recorded a liability of $1.9
million.  In May 2008, the Company entered into an $8.0 million
notional value interest rate swap with a fixed LIBOR rate of 2.97% that expires
on May 1, 2011.  The LIBOR rates are subject to an additional credit
spread which could range from 125 basis points to 325 basis points and was equal
to 325 basis points as of March 28, 2009.  The Company records as an
asset or liability the cumulative change in the fair market value of the
derivative instrument, and as of March 28, 2009, the Company recorded a
liability of $0.3 million.
 
 Net cash
used for investing activities for the thirteen weeks ended March 28, 2009 was
$14.4 million, which included $14.3 million of capital expenditures primarily
related to investments in the Company’s new manufacturing and distribution
facility.
 
 Net cash
from financing activities for the thirteen weeks ended March 28, 2009 totaled
$10.4 million, driven by a $10.5 million increase in long-term debt primarily
due to investments in the Company’s new manufacturing and distribution
facility.
 
 The
Company currently anticipates that for the foreseeable future cash flow from
operations, along with the continued availability under the Bank Credit
Facility, the PIDC Credit Facility, the MELF Loan 1 and the MELF Loan 2 will
provide sufficient cash to meet operating and financing
requirements.
 
 Critical
Accounting Policies and Estimates
  Management’s
Discussion and Analysis of Financial Condition and Results of Operations is
based on the condensed consolidated financial statements and accompanying notes
that have been prepared in conformity with GAAP. The preparation of such
condensed consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.
  Included
in the Company’s Annual Report on Form 10-K for fiscal 2008 (“2008 Form 10-K”)
are the significant accounting policies of the Company, which are described in
Note 1 to the consolidated financial statements, and the critical accounting
estimates, which are described in the Management’s Discussion and Analysis of
Financial Condition and Results of Operations in the 2008 Form
10-K.  Information concerning the Company’s implementation and impact
of new accounting standards is included in Note 1 of the condensed consolidated
financial statements included herein.  Otherwise, there were no
changes in the Company’s critical accounting policies and estimates in the first
quarter of 2009 which had a material impact on the Company’s financial
condition, change in financial condition, liquidity or results of
operations.
 
 Forward-Looking
Statements
 
 Statements
contained in this Quarterly Report on Form 10-Q, including but not limited to
those under the heading  “Management’s Discussion and Analysis,”
contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, and are subject to the safe harbor
created by that Act.  Such forward-looking statements are based upon
assumptions by management, as of the date of this Report, including assumptions
about risks and uncertainties faced by the Company.  These
forward-looking statements can be identified by the use of words such as
"anticipate,'' "believe,'' "could,'' "estimate,'' "expect,'' "intend,'' "may,''
"plan,'' "predict,'' "project,'' "should,'' "would,'' "is likely to,'' or "is
expected to'' and other similar terms.  They may include comments
about relocating operations and the funding thereof, legal proceedings,
competition within the baking industry, concentration of customers, commodity
prices, consumer preferences, long-term receivables, inability to develop brand
recognition in the Company’s expanded markets, production and inventory
concerns, employee productivity, availability of capital, fluctuation in
interest rates, pension expense and related assumptions, changes in long-term
corporate bond rates or asset returns that could affect the pension corridor
expense or income, governmental regulations, protection of the Company’s
intellectual property and trade secrets and other statements contained herein
that are not historical facts.
 
 23
  Because
such forward-looking statements involve risks and uncertainties, various factors
could cause actual results to differ materially from those expressed or implied
by such forward-looking statements, including, but not limited to, changes in
general economic or business conditions nationally and in the Company’s primary
markets, the availability of capital upon terms acceptable to the Company, the
availability and pricing of raw materials, the level of demand for the Company’s
products, the outcome of legal proceedings to which the Company is or may become
a party, the actions of competitors within the packaged food industry, changes
in consumer tastes or eating habits, the success of business strategies
implemented by the Company to meet future challenges, the costs to lease and
fit-out a new facility and relocate thereto, the costs and availability of
capital to fund improvements or new facilities and equipment, the retention of
key employees, and the ability to develop and market in a timely and efficient
manner new products which are accepted by consumers.  If any of our
assumptions prove incorrect or should unanticipated circumstances arise, our
actual results could differ materially from those anticipated by such
forward-looking statements.  The differences could be caused by a
number of factors or combination of factors, including, but not limited to,
those factors described in the Company’s 2008 Form 10-K, “Item 1A, Risk
Factors.”  There can be no assurance that the new manufacturing
facility described herein will be successful.  The Company undertakes
no obligation to publicly revise or update such forward-looking statements,
except as required by law.  Readers are advised, however, to consult
any further public disclosures by the Company (such as in the Company’s filings
with the SEC or in Company press releases) on related subjects.
 
 Item 3.     Quantitative and Qualitative
Disclosures about Market Risk
 
 Not
required for smaller reporting companies.
 
 Item 4.     Controls and
Procedures
 
 (a) Evaluation of Disclosure Controls
and Procedures
 
 The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company’s reports filed or
submitted pursuant to the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and
forms.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure at a reasonable assurance
level that such information is accumulated and communicated to the Company’s
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosure.
 
 Management
of the Company, including the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of the Company’s
disclosure controls and procedures (as defined in the Exchange Act Rule
13a-15(e)) as of March 28, 2009.  Based upon the evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective as of March 28,
2009.
  (b)
Changes in Internal Control over Financial Reporting
 
 During the
thirteen weeks ended March 28, 2009, there have been no changes in the Company’s
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
  24
 
 TASTY
BAKING COMPANY AND SUBSIDIARIES
 
 PART
II.  OTHER INFORMATION
 
 
 Item 6.     Exhibits
  (a)Exhibits:Exhibit
      31 (a) – Certification of Chief Executive Officer pursuant to Section 302
      of the Sarbanes-Oxley Act of 2002.Exhibit
      31 (b) – Certification of Chief Financial Officer pursuant to Section 302
      of the Sarbanes-Oxley Act of 2002.Exhibit
      32      – Certification pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
  25
  TASTY
BAKING COMPANY AND SUBSIDIARIES
 
 SIGNATURE
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
  TASTY BAKING COMPANY(Company)May 4, 2009
                                        
                                        /s/
      Paul D. Ridder(Date)
                                        
                                        PAUL
      D. RIDDERSENIOR
      VICE PRESIDENTANDCHIEF
      FINANCIAL OFFICER(Principal
      Financial andAccounting
      Officer)
  26